Here’s Why Are We Revising HPQ’ Stock Price Estimate To $14.50

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Hewlett-Packard Incorporated (NYSE:HPQ) is operating in two challenging industries (i.e., PCs and Printer Hardware) and both are witnessing a secular decline in shipments and revenues. Despite these underlying trends in the industry, HPQ is witnessing marginal improvement in its performance metrics across its divisions. As a result, we have revised the stock price estimate for the company from $12.40 to $14.50 per share:

HPQ Price Revise TO $14.50two

Improvement In Printer Hardware Average Sales Price (ASP) And EBITDA

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HPQ is focusing on selling higher-end laser printers and improving sales of its multi-function printers (MFP). [1] Importantly, the company is targeting small- and medium-sized businesses (SMBs) for selling its MFPs and printers. As a result, HPQ’s market share and ASPs have improved in the last six months. We have increased the ASP for HP’s printer by 2.3% and market share by 50 basis point. Furthermore, due to a tighter control over costs, HPQ’s Printer EBITDA have improved and we expect that its EBITDA margins will improve by 100 basis point over our forecast period to 18.5%. This has resulted in 9% or $1.12 upside to our stock price estimate.

Improvement In Laptop Market Share, Average Sales Price (ASP) And EBITDA

HPQ is targeting the premium laptop market and launched its Spectre line of laptops in 2016. The company is targeting tech-savvy enterprise clients with its new offering. Despite intense competition from Lenovo and Apple, HPQ’s market share and ASPs have improved over the last nine months due to strong ties with its enterprise customers. We have increased the ASP for HP’s laptops by 1% and expect that company’s ASP will fall at a slower pace in the future. Furthermore, we now project that market share would improve by 90 basis point by the end of our forecast period in 2023 due to the launch of new laptops. Additionally, better management of the supply chain and the increasing ASPs of laptops should help the company to post 100 basis point improvement in EBITDA over our forecast period to 6.12%. This has resulted in 7% or $0.87 upside to our stock price estimate.

Improvement in Desktop EBITDA

The desktop industry is witnessing a secular decline in shipments due to the ubiquitous use of laptops and smartphones. As a result, HPQ is witnessing a decline in its PC shipments. However, it has been able to maintain a tighter control over its desktop supply chain and sell PCs to its enterprise clients. As a result, EBITDA margins for desktop have improved marginally over the past couple of quarters. We have revised the EBITDA margins for the desktop division by 40 basis points. This has resulted in 1% upside to our stock price estimate.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment / ask questions on the comments section

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our full analysis for Hewlett Packard Incorporated

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Notes:
  1. HP Inc Reinvents Business Printing with New Portfolio and PageWide Product Line, March 8 2016 []